Debunking the Student Loan Bankruptcy Myth

Published by Jason Iuliano (Cofounder, Lexria) on 10/27/2020

Contrary to what you’ve been told, student loans can be discharged in bankruptcy. Thousands of people have done it, and with the right legal help, millions more will. This is a bold claim obviously, but before we can explain why it’s possible, we need to address how the myth of non-dischargeability arose in the first place.

“You can’t discharge student loans in bankruptcy.” I’m sure you’ve heard this before. You may have read it in a publication you trust. Your financial advisor may have recited it as an immutable fact. Or your attorney may have even stated it as a definitive legal conclusion. Everyone, it seems, is in agreement. If you have student loan debt, bankruptcy is not an option. There’s just one problem: This accepted “wisdom” is nothing more than a myth.

It all stems from a provision in the United States Bankruptcy Code that requires people to show “undue hardship” in order to discharge their student loans. Back in the eighties, a few judges ruled that the bar to proving undue hardship should be very high. That you needed to have a severe disability and be completely unemployable to even have a shot. Although these cases weren’t representative of student loan bankruptcies, for the last thirty years, they have dominated the narrative. Media and lawyers sought out decisions that confirmed their beliefs of non-dischargeability and dismissed all decisions to the contrary. And today, due to a handful of high-profile denials, journalists, scholars, and attorneys all think that student loans aren’t dischargeable in bankruptcy.

And this leads us to the main question: Where’s the proof that student loans are dischargeable? Well, it lies in a peer-reviewed study I conducted. By examining outcomes in a national sample of student loan bankruptcy cases, I found that the empirical reality is very different from the accepted wisdom. Nearly half the people who petition the courts for a student loan discharge get one. That result is a far cry from what’s depicted in the media. And it illustrates that the undue hardship standard is not such an insurmountable barrier.

In fact, in most courts, debtors seeking to prove undue hardship must demonstrate just three things:

  1. a current inability to repay their student loans, 
  2. a future inability to repay their student loans, and 
  3. a past good faith effort to have repaid their student loans. 

In short, if you don’t have the money to repay your student loans now, don’t anticipate a significant change in your financial circumstances, and have worked hard to manage your debts, then you have a very good chance of proving undue hardship and receiving a student loan discharge.

In many ways, the myth of non-dischargeability is to blame for the student loan crisis. Because few people realize that student loans are dischargeable, everyone has focused their efforts on congressional reforms. And that’s a shame. Although legislative change is a noble goal, given the partisan gridlock, it’s unlikely to happen. Even worse, these efforts have distracted everyone from the solution that already exists: bankruptcy.

If paying off your student debt seems insurmountable, get in touch with us at Lexria. Our team of experts may be able to help you shed those loans and get the fresh start you deserve.

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